The following strings together a number of observations from articles appearing in The Economist magazine. This summarizes some of the key developments taking place in China. That country’s role on the world stage is gaining prominence at a pace that is hard to imagine. Plus, its profile will become even more prominent once the eyes of the world are focused on the Summer Olympic Games about to take place in Beijing in August.

In 2008, China is about to overtake the United States as the country with the largest number of Internet users. It is already the world’s largest cell-phone market. It is also about to become the world’s second-largest car market, next to the U.S.

In international trade, China has moved ahead of Germany to become the world’s largest exporter. At the same time, it has become the world’s second-largest importer, moving ahead of Germany and trailing only the U.S. It is fast becoming the world’s third-biggest economy, behind the U.S. and Japan (at market exchange rates). On a more micro level, China will soon surpass the U.S. as Australia’s largest trading partner.

It is generally accepted that the Chinese economy has been kept pumped up by government spending in order to impress the world while Beijing hosts the Olympics. Interest rates are artificially low and there are price controls on energy and food. But what happens after that? Already, the U.S. slowdown is starting to have some effect on the demand for Chinese goods. Will this start a snowball effect?

There are a number of reasons not to expect a massive collapse in the Chinese economy after the Summer Games. First, the government has a surfeit of financial reserves due to the country’s huge trade surplus. Therefore, there is considerable potential to add domestic stimulus, if needed, through lower taxes. Furthermore, the Chinese government has the resources to keep on spending on public projects. For example, Beijing has an ongoing water shortage that has only been partly addressed so far.

Another factor that will support domestic demand will arise from a key social trend.  The one-child policy in China is about to speed up the empty-nester effect. The proportion of the population aged 40 to 64 with no children or children who will be leaving home is rising at a much faster pace than the general population, +1.8% per year versus +0.2%. This will free up considerable disposable income, particularly if mothers go back to work. The boost given to the economy in terms of demand for more higher-end consumer goods will be substantial.

Having said all of the foregoing, it is important to keep in mind how different the Chinese version of a “free market” economy is to the one in operation in most of the developed world (mainly excluding Japan). I’ll continue with this discussion tomorrow.

Alex Carrick

Find Canadian construction-related economic articles in Canadian Construction Market News and in the Economic Outlook section of Daily Commercial News.

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07/10/2008 - posted by marcus

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